One Habit That May Improve Your 401(k) Performance
Rebalancing is the act of periodically adjusting your 401(k) investments back to your intended asset allocation. While it does not guarantee higher returns, regular rebalancing may help manage risk, maintain diversification, and keep your retirement strategy aligned with your long-term goals.
Takeaways
- Rebalancing can help restore your 401(k) to its intended mix of investments after market movements cause portfolio drift.
- Portfolio drift can increase your risk exposure without you making a single change to your account.
- A portfolio that no longer matches your target allocation may no longer align with your retirement goals.
- Regular rebalancing may help maintain diversification and keep your long-term investment strategy on track.
- Rebalancing is not just about predicting the market. It’s also about staying disciplined and managing risk over time.
Why Your 401(k) May Look Different Than You Think
You set up your 401(k). You chose your investments. You’ve been contributing faithfully.
But here’s a question worth asking: When did you last look at your portfolio?
The way you set things up does not always stay the same.
Markets are in a constant state of flux, and, as they move, the investments inside your account move with them.
That means the allocation you carefully chose when you started – the split between stocks, bonds, and other investments – may look very different today than it did when you set it up.
And herein can lie the problem.
What Does It Mean to Rebalance Your 401(k)?
Rebalancing your 401(k) means adjusting the mix of your investments when your current asset allocation has drifted away from your intended target.
Think of it this way: You start with a goal – a certain ratio of stocks, bonds, and other investments – based on how far you are from retirement and how much risk you are comfortable taking.
That mix was chosen for a reason.
But portfolios do not stay static.
Even if you never change your investment selections, fluctuations in the market change the weight of each asset class inside your account.
Why Does Your 401(k) Drift Offtrack?
Market performance shifts your allocation whether you act or not.
If stocks perform well over several quarters, they may begin to make up a larger portion of your portfolio than you originally planned.
For example, if you set your 401(k) to be 70% stocks and 30% bonds, but a strong stock market pushed that to 76% stocks and 24% bonds, your portfolio may be carrying more risk than you intended.
That might not feel concerning when markets are climbing.
It can feel very different when they are not.
The reverse can also be true.
If bonds or other conservative assets grow disproportionately, your portfolio may miss out on growth opportunities over time.
Either way – too heavy on stocks or too light on them – your account is no longer working the way you designed it to.
That is what can make drift worth paying attention to. It does not require you to make a mistake. It happens on its own.
What Are Some Risks of Not Rebalancing Your 401(k)?
Letting your 401(k) drift without periodic review may introduce risks that could affect your retirement goals.
- Unintended risk exposure. As stocks outperform, they may become overweighted – making your portfolio more vulnerable to a market downturn than your original allocation was designed to handle.
- Portfolio drift from your long-term strategy. Say you intended a 60/40 split between stocks and bonds. Over time, market performance may shift that to 75/25. That drift increases your exposure and may put you off course from where you were trying to go.
- Reduced capital preservation as retirement approaches. As you get closer to retirement, protecting what you have built can become as important as growing it. An unreviewed portfolio may be holding more high-risk assets than is appropriate for your stage of life.
- Emotional decision-making. When a portfolio has not been reviewed, and the market drops, the gap between where you are and where you intended to be may feel larger. A disciplined review process may reduce the likelihood of reacting emotionally to short-term market swings.
- Missed opportunities for strategic growth. Rebalancing is not only about managing risk. By periodically selling overperforming assets and reinvesting in underweighted ones, you follow a buy-low, sell-high discipline that may help improve performance over time, especially when done consistently.
Why Rebalancing Is about More Than Returns
When it comes to retirement savings, the focus is often on returns.
But there is another side of the equation that deserves equal attention: What you keep.
Rebalancing is not only about helping your account grow.
It can also be about protecting the progress you have already made.
A portfolio that has drifted heavily into equities during a period of growth may give back a portion of those gains in a downturn if it was never brought back into alignment.
By periodically selling overperforming assets and reinvesting in underweighted ones, you are following a discipline that helps keep your strategy intact.
That discipline does not require you to save more.
It requires you to manage what you already have.
How Often Should You Rebalance Your 401(k)?
The answer to this depends on your situation, your risk tolerance, and your timeline for retirement.
Some investors choose to rebalance on a set schedule – quarterly or semiannually.
Life events – such as job changes, income shifts, or health considerations – can also impact how much you want to save, how long you’ll need your money to last, or how much market risk you’re willing to accept.
Rebalancing does not eliminate risk, and it does not guarantee improved returns.
But it is one way to work toward staying on track with your intended long-term plan.
Should You Get Help Rebalancing Your 401(k)?
You can rebalance your 401(k) on your own.
But if you are not confident about asset allocation, understanding market cycles, or knowing when and how to adjust your portfolio, professional guidance may help you avoid costly mistakes.
401(k) Maneuver provides independent, professional account management with the goal to help employees, just like you, grow and protect their 401(k) accounts.
Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance.
401(k) Maneuver allows you to go about your life doing what you love with confidence, knowing we are handling the changes for you.
Here’s what you can expect as a 401(k) Maneuver Client:
- You receive professional quarterly 401(k) account rebalancing that is personalized to your tolerance to risk and based on current economic and market conditions.
- You get an email notification every time we review your account.
- You get membership to our online community where you’ll get exclusive access to content that can help you better prepare for retirement.
- You get access to a private Facebook group where you can ask questions and get answers from our experienced advisors.
